AGS Transact Technologies

Diversified and well integrated cash management and digital payments solutions provider

Dominant business position, improving cost efficiency, higher revenue from hike in ATM interchange fees and change in cassette swap norms, reduction in high-cost debt to drive profitability

AGS Transact Technologies incorporated on 11 December 2002 is one of the largest integrated omni-channel payment solutions providers in India in terms of providing digital and cash-based solutions to banks and corporate clients. It provides customized products and services comprising Automated Teller Machine (ATM) and Cash Recycler Machine (CRM) outsourcing, cash management and digital payment solutions including merchant solutions, transaction processing services and mobile wallets.

The company is the second largest company in India in terms of (i) revenue from ATM managed services under the outsourcing model, and (ii) revenue from cash management and number of ATMs replenished as of 31 March 2021. The company has deployed 221,066 payment terminals and was one of the largest deployers of Point of Sale (POS) terminals at petroleum outlets in India, having rolled out Integrated Payment Solutions (IPS) at more than 16,000 petroleum outlets with 28,986 terminals in India.

The company has also pioneered IPS with Oil Marketing Companies (OMCs). The company has derived 95.6% of revenues from operations in India, although it has expanded internationally to offer automation and payment solutions to banks and financial institutions in other Asian countries comprising Sri Lanka, Singapore, Cambodia, Philippines, and Indonesia.

AGS Transact Technologies started providing banking automation solutions in India in 2004. Its deployed products from international solution providers such as Diebold Nixdorf and established its own country-wide service infrastructure and automation solutions expertise to provide related services. Beginning in 2009, the company leveraged its banking automation solutions expertise and service reach to offer ATM outsourcing and managed services by, among other things, entering into two cooperation agreements with Diebold Nixdorf for banking and retail products.

As part of strategy to strengthen presence in the cash value chain, offer an integrated payments platform and improve operational efficiencies, AGS Transact Technologies commenced offering transaction switching services in 2011 and cash management services in 2012. In 2014, the company expanded offerings into digital payment solutions, enhancing integrated digital platform and Software-as-a-Service (SaaS) capabilities. In 2016, the company also entered an alliance with ACI Worldwide (ACI), a leading international payments solution provider, which has further strengthened value proposition to customers.

Ravi B Goyal is the Promoter, Chairman and Managing Director of the company and has approximately 26 years of experience in the technology sector. He is responsible for the management of the overall operations of the company and their subsidiaries.

The company operates business in three segments, 1) Payment Solutions, 2) Banking Automation Solutions and 3) Other Automation Solutions (for customers in the retail, petroleum and colour sectors).

The Payment Solutions segment comprises ATM and CRM outsourcing and managed services, cash management services, Intelligent Cash Deposit (iCDs), digital payment services which include toll and transit solutions, Fastlane, transaction switching services, services through POS machines and agency banking. The customers in the Payment Solutions segment include ICICI Bank, Axis Bank, HDFC Bank and Federal Bank.

In ATM and CRM outsourcing and managed services businesses, the company is responsible for the end-to-end management of ATMs and CRMs, starting from site identification and development, followed by machine deployment, maintenance, and management on behalf of the customers. The company owns the ATMs and CRMs in outsourcing services business, while the ownership of ATMs and CRMs remains with the customers themselves under managed services business. The portfolio consisted of 14,099 ATMs and CRMs under outsourcing business and 19,161 ATMs and CRMs under managed services business in India end August 2021. The company also provides outsourcing solutions for 1,273 ATM and kiosks in Sri Lanka end August 2021.

The cash management services of subsidiary, Securevalue India (SVIL), build on ATM outsourcing and managed services businesses, and include cash replenishment, cash pick-up, cash-in-transit (CIT), cash vaulting and cash processing services for ATMs managed by the company and by other operators. The company provides cash management services to 46,214 ATMs through a fleet of 2,513 cash vans including 267 dedicated cash vans to banks, and 475 vaults and spoke locations, covering approximately 1,860 cities and towns in India end August 2021. SVIL is the second largest cash management company in India, in terms of revenue from cash management and number of ATMs replenished end March 2021. SVIL is the only cash management company that has followed Ministry of Home Affairs (MHA) guidelines on a pan-India basis. It has also implemented cassette swaps for outsourcing services business. One of major customers in cash management services is BTI India Payments and Hitachi Payment Services.

The merchant services include device-based and device-less payment solutions, prepaid and loyalty programs, Cash@POS, payment gateway and remote payment solutions, loans against card receivables and other VAS. The company has 180,993 merchants as clients end August 2021. In a span of two years, the company has become one of the largest deployer of POS terminals at petroleum outlets in India. The focus is on serving the oil marketing industry, private and public sector banks, and corporate merchants. Of 221,066 POS terminals deployed with clients end August 2021, 183,985 terminals were located at retail and corporate outlets and 37,081terminals were located at OMCs.

The GTV transacted through POS terminals at OMC retail outlets was Rs 9517.8 crore in 5MFY2022 and Rs 13365.63 crore in FY2021. The company has orders in hand from major OMCs including Hindustan Petroleum Corporation (HPCL) and Indian Oil Corporation (IOCL). Other corporate customers for digital portfolio include Dr. Lal Pathlabs, Patanjali Ayurved, Sunshine Teahouse (Chaayos), RJ Corp, VRIPL Retail, Om Sweets, Lata Mangeshkar Medical Foundation and Organic India.

In April 2021, to further enhance digital capability and to leverage on the Pre-Paid Payment Instrument (PPI) authorization issued to subsidiary, India Transact Services (ITSL), the company has started open loop Ongo prepaid card, which can be used by consumers to pay for transactions.

The company also provides transaction switching services, where it integrates a variety of payment channels, including internet payment gateways and several mobile payment systems, to route, switch, and process electronic transactions even across non-banking segments.

The Banking Automation Solutions business segment, which commenced in 2004, comprises sale of ATMs and CRMs, currency technology products and self-service terminals and related services and upgrades. The company has approximately 50 banking customers, including ICICI Bank, HDFC Bank and Axis Bank.

Other Automation Solutions business segment encompasses the sale of machines and related services to customers in the retail, petroleum and colour segments. The company supplies automation products and provides implementation services, system integration, remote management and support and help desk services. The colour operations primarily comprise the supply of automatic paint dispensers and related services, and serve customers including Asian Paints, Kansai Nerolac Paints and Berger Paints India.

The revenue from payment solutions segment accounted for 76.8%, banking automation solutions 9.1% and other automation for 14.1% of revenues in FY2021. The revenue from overseas operations accounted for 4.4% of total revenue in FY2021.

The company had installed, maintained, or managed a network of approximately 72,000 ATMs and CRMs, provided cash management services to 46,214 ATMs through SVIL, installed 221,066 merchant POS and approximately 46,800 cash billing terminals, automated approximately 17,924 petroleum outlets and installed approximately 88,521 colour dispensing machines. The operations covered approximately 2,200 cities and towns, servicing approximately 446,000 machines or customer touch points end August 2021.

The work force comprised of 12,935 personnel. The technology development team comprised 213 employees and has developed and customized ATM client software and digital applications.

The company intends to be a leader in payment solutions by delivering secure, innovative products that engage a customer across the product value chain in a cost-effective manner. It would focus on growing digital payment solutions business, pivot from payments-as-a-service to payments-as-a-convenience through ongo card and ecosystem, ATM and CRM outsourcing and managed services, enhancing integrated technology payments platform, cash management services and expand internationally

The Offer and the Objects

The initial public offer (IPO) consists entirely of an offer of sale (OFS) comprising raising of Rs 680 crore by issuing 4.10 crore equity shares of face value of Rs 10 each at lower price band of Rs 166 and 3.89 crore equity shares at upper price band of Rs 175.

The issue is to be made through the book-building process and will open on 19 January 2022 and will close on 21 January 2022.

The company expects to receive the benefits of listing of the Equity Shares, including to enhance visibility and brand image among existing and potential customers.

The promoter shareholding at 98.23% would decline post issue to 66.07%.

The Company and Ravi B. Goyal (the Promoter Selling Shareholder) have entered into an agreement pursuant to which Ravi B. Goyal has agreed to purchase the compulsorily convertible preference shares (CCPS) of Vineha Enterprises, corporate promoter of the company, (VVPL) currently held by Company from his share of the Offer Proceeds. The company proposes to utilize such sale proceeds from the sale of VEPL CCPS primarily to redeem the outstanding Listed NCDs issued by Company.

Strengths

The company is one of the largest integrated omni-channel payment solutions providers in India in terms of providing digital and cash-based solutions serving diverse industries such as banking, retail, petroleum, toll and transit, cash management and fetch in India and other select countries in Asia.

The services of the company help increase the speed and accuracy of cash as well as digital payment transactions.

The size and wide reach of operational network of the company enables to realize economies of scale.

The payment platform of the company accepts payments through a broad spectrum of options including magnetic stripe, chip and pin, contactless, Bharat QR, Unified Payment Interface (UPI) and Aadhaar Pay, making it a partner of choice for merchants.

The company also provides support services such as a 24x7 call centre, merchant management services, software development, operations services, and monitoring services.

Since the company commenced business in 2004, it has developed in-house technology and expertise to deal with the entire product life cycle of ATMs, CRMs and related services, including manufacturing of ATMs, site identification, site build up, deployment, maintenance and operations including monitoring, cash management, first line maintenance and second line maintenance.

The company is the only company in India to provide the full range of services in the ATM managed services market, namely: ATM equipment and supply, maintenance of ATMs, managed services, ATM replenishment and CIT and retail cash management and cash pickup and delivery.

The company is the second largest company in India in terms of (i) revenue from ATM managed services under the outsourcing model, and (ii) revenue from cash management and number of ATMs replenished.

The size of operations, experience and overall infrastructure gives a significant competitive advantage to the company.

The ability to provide services across the cash and digital value chain from transaction touchpoints, channel handlers, core processing, settlement and clearing, authorization systems and back office has allowed the company to become the preferred partner for cash and digital payment solution needs of customers.

The experience and expertise, coupled with knowledge of the industries in which customers operate, enable the company to provide them with customized solutions evident in the comprehensive suite of merchant solutions launched over the years.

The company has diversified product portfolio, customer base and revenue streams leading to cross-selling opportunities. The company derives revenues from a variety of products and services catering to customers across diverse industries such as banking, retail, petroleum and colour. In each of these industries, it offers a combination of automation solutions along with payment and maintenance services.

The company has long-standing relationships with leading global technology providers, such as Diebold Nixdorf and ACI, which has enhanced market position and enabled the company to be the leaders in the payment solutions industry.

The company has also established relationships with leading Indian financial institutions, leading retail chains, colour companies and petroleum companies.

The company has dedicated in-house infrastructure, skills and technological capabilities, which are critical to the growth of the business enabling to realize economies of scale and increase productivity.

India is the third largest ATM market in the world based on number of installed ATMs

The number of banks outsourcing their ATM servicing is also rising as banks focus increasingly on their core business and operations and seek to increase their productivity and reduce costs.

An increase in the interchange fee per ATM transaction from Rs 15 to Rs 17 for financial transactions in India is expected to further support ATM infrastructure growth and deployment.

After the implementation of the cassette swap and the MHA guidelines, cash replenishment charges will also increase to Rs 12500 to Rs 13000 per ATM per month from Rs 6500 to Rs 7500 per month earlier.

Weaknesses

The Coronavirus pandemic has had and may continue to have certain adverse effects on business, as the continuing impacts of Coronavirus are unpredictable.

The company derives a significant portion of revenues from customers in the banking sector in India. The revenue from customers in the banking sector were 68.1% of total revenue in FY2021.

Any adverse development in the growth of the number of ATMs in India, reduction in transaction fees or a decline in the usage of the ATMs managed, operated, and maintained by the company could have an adverse effect on business.

The company derives a substantial portion of revenues from a limited number of customers. Top 10 customers contributed 62.8% of revenues in FY2021. The revenues of the company would be impacted if one or more of top customers were to suffer a deterioration of their business, cease doing business with the company or substantially reduce its dealings with the company.

A decrease in the use of cash as a mode of payment could have an adverse effect on business. In the event of a decline in the use of cash as a mode of payment, banking customers may decide not to expand their ATM network or may downsize their current ATM network.

The company relies on consumers using one or more of its services and is vulnerable to changes in consumer preferences and behavior.

The industries in which the company operates are highly regulated by the Reserve Bank of India and other government agencies.

The company maintains a significant amount of cash within its company-owned devices and at vault locations, which is subject to potential loss due to theft or other events, including natural disasters.

The company has experienced delays in making payments in respect of provident fund, employees’ state insurance, income tax, goods and services tax (GST), cess and other statutory dues. In respect of delays in making GST payments, the GST liability was Rs 71.12 crore for the company, Rs 20.30 crore for SVIL and Rs 0.29 crore for ITSL aggregating to Rs 91.72 crore on a consolidated basis.

Due to non-payment of GST liabilities within a specified timeline, certain GST registrations of Company and Subsidiary, SVIL, have been made inactive.

Potential new currency designs may require modifications to certain automated banking products in portfolio that could have an adverse effect on business.

The company may face cyber threats attempting to disrupt products and services and theft or leakage of sensitive internal data or merchant or cardholder information, possibly causing disruptions in the transactions processed on or through its products or services.

The industries in which the company operates are highly competitive and such competition may increase, which have adversely affected business.

The company has a substantial amount of outstanding indebtedness, which requires significant cash flows to service. The outstanding amount of Gross Debt was Rs 1654.5 crore, including an aggregate amount of Rs 560.63 crore of Listed NCDs.

The business significantly depends on the use of cash remaining the predominant mode of payment in India. However, the non-cash payments have increased significantly in India and could result in a significant reduction in the use of cash and affect business.

If the RBI introduces a digital currency in the future, it may also impact the amount of cash in circulation.

Valuation

AGS Transact Technologies witnessed 2% yoy decline in revenues to Rs 1758.94 crore in FY2021, after remaining flat at Rs 1800.44 crore for FY2020 over FY2019. However, the company has improved OPM from 23.5% in FY2019 to 24.8% in FY2021 and maintained nearly stable OPM at 24.5% in five months ended August 2021.

The company posted 25% growth in the net profit to Rs 83.01 crore in FY2020, but the net profit declined 34% to Rs 54.79 crore in FY2021. The company has posted net loss of Rs 18.11 crore in 5MFY2022 with lower revenues and higher operating and finance cost.

AGS Transact Technologies posted RoEs of 15.5% in FY2019 and 16.6% in FY2020, while RoEs have eased to 9.8% in FY2021 and turned negative at 8.0% (annualized) for five months ended August 2021.

The post issue book value (BV) of AGS Transact Technologies is Rs 45.3. P/BV works out to 3.7 times at the lower price band of Rs 166 per share and 3.9 times at the upper price band of Rs 175 per share.

The consolidated EPS of AGS Transact Technologies for FY2021 works out to Rs 4.6 and offer is made at PE of 38.5 times at upper price band of Rs 175.

The post issue m-cap for AGS Transact Technologies works out to Rs 2107 crore at upper price band.

Among the comparable peers, SIS, the second largest cash logistics services provider in India with diversified business, is trading at 3.8 times its book value end September 2021 and PE of 18.9 times FY2021 consolidated EPS.

The recently listed CMS Info Systems which is the leading cash management company is trading at 4.4 times its book value end August 2021 and PE of 27.4 times FY2021 consolidated EPS

The overall OPM of SIS has hovered in the range of 5% to 6% for last five years. The revenues of SIS have increased at CAGR of 13% between FY2019 to FY2021. SIS has also posted healthy RoE of 16-20% during last five years.

CMS Info Systems has improved the OPM from 17.3% in FY2019 to 18.4% in FY2020, 22.5% in FY2021 and further higher to 23.9% in five months ended August 2021. The revenues of CMS Info Systems have increased at CAGR of 7% between FY2019 to FY2021. CMS Info Systems has consistently improved RoE from 12.9% in FY2019 to 15.8% in FY2020, 17.1% in FY2021 and 19.1% (annualized) for five months ended August 2021.

AGS Transact Technologies expects to benefit from dominant position in cash management business, strong growth potential of digital payment products business, improving cost efficiency, higher revenue from hike in ATM interchange fees and change in cassette swap norms, reduction in high-cost debt.